When the Functional Currency Is the Foreign Entity's Currency

question 12

Multiple Choice

When the functional currency is the foreign entity's currency:

• A) exchange rate changes do not affect the economic well being of the parent
• B) the subsidiary operates as an entity, independent of the parent
• C) Exchange rate changes do not have immediate impact on the cash flows of the parent
• D) All of the above are correct

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Definitions:

Compensating Balances

A minimum bank account balance a borrower is required to maintain as part of a loan agreement, offering the bank some security.

Transactional Motive

The transactional motive is the need to hold cash for the purpose of conducting day-to-day business operations, such as paying wages and suppliers.

Zero Balance Account

A zero balance account is a type of bank account that maintains a balance of zero dollars by automatically transferring funds from a master account in the exact amount of transactions clearing the account.